In simple terms, a cash flow forecast is a plan that shows how much money you expect your business to receive (inflows) and payout (outflows) over a set time. It can help you plan how much you wish to make in sales and spend on costs. It can also help you understand when money will enter and leave your bank account.
Cash flow forecasting is an essential exercise for your advice business. You need to ensure a positive cash balance to meet everyday expenses. A potentially profitable business may fail if it has cash flow problems.
In addition to the cash flow forecast, a cash flow statement is a backwards-looking statement that shows what happened to cash inflows and outflows historically.
It is worth asking why cash is so important? After all, cash is just an asset that the business needs to help it to function. It is no different from inventories or non-current assets. People and organisations will not usually accept anything other than cash to settle their claims against the business.
If the business does not have enough cash, the company will be unable to pay its expenses. If the business employs people, it must pay them in cash. If it needs to buy an asset, it will need to be paid in cash, usually after a short credit period. Most businesses fail because of their inability to find the cash to pay the amounts owed. Without appropriate cash flow panning, quite simply, your business might not survive the test of time. If it does, it’s by luck more than judgement.
Be conservative with your forecasts. Many businesses fail because they dramatically underestimate expenses and overestimate sales or revenue.
If you are a limited company, the law does not require you to submit cash flow forecasts to companies’ houses as a part of your business accounts. However, they are essential to ensuring business health and longevity for all business owners regardless of the legal structure (Sole Trader, Partnership, Limited Liability Partnership, Limited).
It is always best practice to seek the advice and services of a qualified and reputable accountant. A business owner needs to be familiarised with a cash flow forecast to have a great understanding and awareness of the financial workings of the business.
You can access a template with an example cash flow forecast, which will show a typical structure and help you familiarise yourself with the format and some of the formulas that can be used.
Disclaimer: The information contained within this article is designed to familiarise you with cash flow forecasting. Please seek the advice and services of a qualified and reputable accountant if you wish to prepare a cash flow forecast for your business.
